The Financial Independence Step Most People Forget: Estate Planning

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2:30Mindy Jensen:Most people spend years building wealth, investing for retirement and working towards their financial independence goal. But many overlook one of the most important details of a complete financial plan, an estate plan. And Carl and I were guilty of that. We didn't build an estate plan until our oldest daughter was 19. In this episode, we're going to discuss why you need an estate plan and how to start the process to build yours today.

3:02Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and as a special treat, I have Carl Jensen with me today. Hello. That's it? Just hello? Yeah, that's it. Okay. I'm a man of few words. There we go. I hope you're not. You're co-hosting this episode with me. Today, we are joined by Skipton Reynolds, who is our actual estate planning attorney, and we are excited to pick his brain on the topic of estate plans. So, without further ado, welcome, Skip, to the BiggerPocketsMoney podcast. Matt, thank you so much for having me. I'm really looking forward to joining you today.

3:39Mindy Jensen:I am too. I have been planning this since we finished our estate plan at the very, very beginning of this year. It took us about six to eight months to just figure out all the things that we wanted in the estate plan. And I know why we never did it. But why do you think most people ignore estate planning? I think there's lots of reasons. I think the number one reason is people don't want to think about not being as well as they are right now or dying. Frankly, you know, there are people that literally say, if I do an estate plan, I'll die. And so then they don't do it. Hard part about that is I can guarantee it's going to happen whether you've done an estate plan or not.

4:21So you might as well do the estate plan and get on with living, at least from my perspective.

4:25Mindy Jensen:Yeah, I'm going to say every single person on this call and listening to this episode will be dead in the next 200 years. I guarantee it. So if we're all going to die, then we need to start thinking about what we want to do with our money. So let's say that something horrible happened to Carl or I or both of us before we had signed our final papers with you. What would have happened to our estate? It kind of depends on a number of factors. So for For example, if one of you had died and you own joint accounts or joint assets, it would have been fairly straightforward. But where you run into road bumps is we don't own everything jointly.

5:10A lot of clients will say, oh, yeah, I own everything jointly. And then I'm kind of a smart aleck. And I'll say, well, do you have a retirement account? Do you have life insurance? And they'll say, yeah, I do. And I said, is that a joint account? And they'll be like, yeah, my spouse is on there as the beneficiary. And I'm like, but it's not a joint account. It's in your name, right? And you guys probably talk about this. but if you don't have a proper beneficiary on one of those accounts that is in one person's name or if you're a single person for example and you die there is the possibility that it goes through probate and depending on your family structure or other factors you may not control where that money ends up just to be clear i think a lot of people would assume including me that hey i'm married the beneficiary is automatically my partner and that's not the case is it so not necessarily right we we do think that and I think it's why people say oh it's it's my money too not realizing that whole differentiation between joint ownership and say a beneficiary but yeah we just assume it's going to go to my spouse or if we have kids it's going to go to my kids kind of thing and depending on your family structure depending on financial institutions depending on the state you live in and their law it can considerably change the answer to that question because you didn't tell us where you wanted it to go.

6:28Because when you die, let's say without a will or you die without beneficiaries or a joint owner, you can potentially lose control. It's what we call dying intestate. I may know a semblance of an answer, but I don't know the 100 % answer. And just from my own personal perspective, I want people to know the 100 % answer, not the 90%.

6:49Mindy Jensen:Okay. So I will share then a slightly different version of this. I have a friend whose husband died all of a sudden, bicycle accident. And because they didn't have a will, she received the first 300 ,000 of their net worth. And then the remainder was split 75 % to her and 25 % to his parents because they didn't have children. That is not what they had planned. And if they had had a will, that isn't what would have happened. If I look at that same parameters, and this was five years ago, perhaps things have changed. But if I look at those same parameters, there's a lot of money that would be going to, well, we have children.

7:35Mindy Jensen:So then it would go to our children, which I guess would be fine. I mean, And that's where we wanted our money to go after we pass. But would it go like the 75, 25? So the answer is, it depends. Great attorney answer, right? But the answer could be yes. And so in that scenario, that 25 % of, you know, yours or Carl's account or accounts that didn't have everything structured properly would not have gone to one another. And maybe it went to your kids before you wanted it to. Or maybe they were minors and now we've got to go set up guardianships and conservatorships for the money. And or they get access to money.

8:14Let's say they're 18 plus here in Colorado. They're going to get that money right away, instantly. No rule books, no parameters. Hopefully they're a good steward of it. And another kind of unfortunate ramification of that is it's not available for the surviving spouse to get to their end, however long that might be, because it skipped them.

8:35Mindy Jensen:Yeah, look at that. As soon as you said that, I'm like, oh, we have guardrails in place because should we pass today, our children aren't getting the money instantly. They'll get enough to live off of and then it'll kind of trickle down over time. I don't think that a 19-year-old and a 16-year-old are going to be good stewards of money at one point, maybe when they're older. Yeah, absolutely. And this is where, at least here in Colorado, the rules are kind of weird. If you had died prior to the kids being 18, we set up a conservatorship that extends until they're 21. But if they're 18, no conservatorship.

9:14So it's kind of like you can smoke cigarettes and vote at 18, but you can't drink till you're 21. Just some of these rules don't align very nicely. So like, for example, in your scenario, one of the kids would get the money right away, no guardrails. The other one would have some guardrails for a period of time, simply based on their age at the time of your death. But you also may not get to pick those things, putting it in the context of your friend. Let's say they had a child that received some of this money and he had died without a will. Now there's no potential guardrails and you don't necessarily get to pick who's going to be in charge.

9:48The court does. And the court could look at mom and say, you know, mom, you're not very good with money or, you know, feels like there's some self-interest here or whatever. and they could appoint a third party who knows nothing about the child, knows nothing about the family and dad has no control because he died.

10:05Mindy Jensen:Okay, so the estate plan is for everybody because everybody's going to die and therefore you need an estate plan. However, I don't really think that estate plans are for absolutely everyone. Like right now I have a 19 year old and a 16 year old and neither one of them have an estate plan. Neither one of them have an estate but they will eventually. So at what point should you start thinking about an estate plan? Long before we did, it took us 25 years. Sure, sure. It took us 53 years, 52 in your case. Well, 25 after marriage. So to be funny here, before you die, right? But trying not to be funny, realistically, there's parts of an estate plan.

10:50Because I think there's two sides to estate planning. There's helping us while we're alive if we're not as capable through things like powers of attorney. But then there's things that do things after we die like wills and trusts and beneficiary designations. So realistically, using the context of your family scenario, if you are 18 years old plus, you might have a bank account and you have medical needs, but you are now an adult. And so your parents are not automatically in charge of those decisions if you have that car accident or other things. So in my mind, they may not need fancy wills or trusts to your point, Mindy.

11:28They may just need the powers of attorney. So that way, if they have that car accident and they're out of commission for a period of time, mom and or dad can step in and deal with their accounts, deal with the doctors and make decisions on their behalf.

11:43Mindy Jensen:Okay. So our 19 year old now needs a medical power of attorney and a financial power of attorney. Okay. So she needs two documents that are pretty easy to draw up. Yeah. Generally speaking. Generally speaking. Does our 16 year old need anything? She is not old enough yet. So you can't do that stuff until you turn 18. That's kind of the threshold there. And honestly, just making a wide ranging recommendation, I think every child 18 and up, their parents need to make sure that they get these powers of attorney because a parent's worst nightmare, I'll give you a real story that happened in our office where their daughter was at the University of Northern Colorado and she had an accident in the dorm.

12:24I think she fell out of her bunk bed that she'd made. She broke her arm. Well, she's in the student clinic with the broken arm and they call mom and dad, but she's over 18. And they say, we have your daughter here. They say, well, can you tell us what happened? They're like, we can't because the daughter hadn't given them consent for whatever the reasons were. Their drive from Denver all the way to Greeley they're just panicking right your mind goes in a million different directions you know what happened kind of thing and they show up and she just got a broken arm but had they had a power of attorney on file or a HIPAA release it would have been a different experience let's say it wasn't a broken arm let's say she'd hit her head and she had a brain bleed and was in a temporary coma they would have had a very difficult time making medical decisions for their daughter without going to an attorney like us to become their guardian so not to scare you but to scare you right?

13:15Okay.

13:15Mindy Jensen:So it sounds like the time to start thinking about your estate plan is when you turn 18 or now, like if you are like Carl and I last December, you didn't have an estate plan. And I don't want to make people feel bad, but I kind of want to make you like light a fire under you and get this going. If you are on the path to financial independence, I am assuming you have some level of wealth. If you're at the beginning of your path, you know, maybe you have a negative net worth. But once you get a positive net worth, clearly, even if you don't have any sort of net worth, you need to have at the very minimum a power of attorney for medical and a power of attorney for financial.

13:51Mindy Jensen:But once you start growing your net worth, where is it going to go? Nobody plans to die walking up in front of a bus or getting into a car accident. It's an accident. It happens. And if you don't have your plan in place, you have to go through probate. Probate is a bad word to everybody who doesn't know estate planning law, which is like the bulk of my audience. What happens in probate? Let's use Carl and I as an example. We both passed and are no will. Now we would have to go through probate because we have kids or do we skip it because we have kids? Really what probate is at kind of a 30 ,000 foot level.

14:31And obviously it's administered slightly different in different states. So obviously if you're not in Colorado, different states have different rules. In fact, there's, I think, still nine or 10 states that have some form of an estate or inheritance tax. So if you live in a different state than Colorado, you might need to be aware of your state's rules that way. But to your question, Mindy, is probate at a 30 ,000 foot view is how do I take somebody's name off of an asset after they've passed away if they don't have a joint ownership with someone else with what we call right of survivorship or a beneficiary designation or have a trust.

15:06If you don't meet one of those three and I die owning a bank account or my house or my timeshare up in Breckenridge, those things will go through probate. And what probate's trying to figure out is it wants to know who's in charge of the estate, most commonly referred to as executor, and it wants to know who are the beneficiaries of that estate. That's what probate is trying to do. And then it's the paperwork process of empowering that executor to go and grab those assets that don't have joint owner, beneficiary, or trust ownership and grab them, pay off all the debts. So there's an attorney I know that she kind of jokes, you essentially are suing yourself for a creditor's benefit, right?

15:47Because you're opening the case so they can come in and make a claim, right? So credit cards and mortgages or whatever might be out there, other claims that might be against you. Like in Colorado, we have to put something in the newspaper notifying creditors that you've died so that they can call your executor and make their claim. So it's just all of these formalities to essentially open it up to the world to come and grab money from your estate. And it's just so that they can grab those assets that got missed because your name is still on them without those other three things. And so my analogy for it is, you remember back in school days when your math teacher would say, show your work and go through every step of the process to get to the answer, that's probate in a nutshell.

16:29It's every step. If your family's not fighting, it might not be awful, but it also opens the door for the fighting because maybe I don't like it that this kid's the executor. I want to be the executor. Or mom told me I was going to get this. All of those skeletons come out in the probate process.

16:46Mindy Jensen:So I found you through Jenny Roselle, who hosts the podcast called Legal Tea. I love that podcast. I love listening to, I'm not even a probate attorney, but I love listening to all the different things that could go wrong in an estate plan. And she has a list of elder and estate planning attorneys in all 50 states at LegalTeaPodcast.com slash C resources. That's S-E-E resources. So if you live in a different state than Colorado. We are primarily talking about Colorado law today because Skip is a Colorado attorney and Carl and I are Colorado residents. But like he said, laws may change in your state.

17:26Mindy Jensen:If you don't have an estate plan, go to Legal Tea Podcast, to the resources page, find an estate attorney and start learning about the process to get yourself an estate plan because you are going to die. Again, I keep saying that. That's not a polite thing to say, but everybody listening to this is going to die eventually. So do you want somebody else to say where your money's going to go? Or do you want your money to go where you want it to go? I mean, I would be really upset if my money didn't go where I was wanting it to go. And yet it still took us 53 years to get an estate plan in place. I'm not 53 yet.

18:02You are.

18:02Mindy Jensen:Oh, wow. Well, and kind of circle all the way back to that point, Mindy, you'd asked the question in the very beginning. You know, what are reasons why people don't do it? Obviously, afraid of death or not thinking they're going to die anytime soon. Those are big reasons. But I also think life, life happens. Like if you guys were to take an honest look, you had talked about doing this many years before we got around to doing it. And then time goes by, right? You know, one month becomes one year becomes five years. And it's not because you didn't have the intention of doing it. you are just doing life, right?

18:37Especially if you've got children, doing life makes life crazy. Every day is a sprint and then a week is gone. It's this weird dilemma of time, I feel like. One other thing I'll say about that whole thing is I think it's a lot more pleasant to do all this work. When death is not imminent, it would feel a lot more macabre and depressing if I was doing this because you absolutely had to do it because something has gone wrong. So while you don't like to ponder this kind of stuff. It feels good. I think I've got at least a couple of good decades left.

19:07Mindy Jensen:Yeah. Well, I hope so. But also, yeah, I think that's a really good point. If one of us had had like, let's say a terminal cancer diagnosis, that would have made this, I mean, it was already stressful enough doing this estate plan because I'm thinking about, well, eventually I will be dead, even though I don't want to think about that. What am I like? I don't want to think that I'm not going to be there for my girls, but eventually, hopefully they will be alive and I won't. So I want my money to go to them. And you actually asked us some pretty thought-provoking questions, which was another reason why it took so long to do.

19:44Mindy Jensen:Do we want to leave money to anybody else? I didn't think about that. So we start going around the family tree. And do we want to leave money to these people or those people? And who do we want to be in charge of our estate? And who do we want to? We still have a minor daughter. So who do we want to be her guardian should we both pass at the same time? One thing that I thought was really interesting was, okay, Mindy and Carl, you said, Mindy and Carl, one of you passes, the other one survives, and in a few years gets married. How do you want your money to be handled in that case? That's not something that I am thinking about at all sitting here in a happy marriage where, you know, we're in our early 50s, some of us earlier than others.

20:26Mindy Jensen:We're in our early 50s, And we're not thinking about marrying anybody else. But yeah, I wouldn't want our hard work to go to your new wife. No, especially if you, well, there's those stories in the media like, who's that? We won't call names, but sometimes young people get married to old people because they have money. Oh, you're going to marry a 26-year-old woman? No, I wasn't saying that. But some other people make those choices and it might happen to you too. I don't know. No, you might. Yeah. Yeah. No. But to your point, Mindy, a lot of us just assume, right? Even if you haven't done any estate planning, we assume it's just going to go to each other if we're married.

21:07But have we been asked the question, even if you've gone through estate planning, I think that sometimes it isn't asked. Because I mean, there's this thing called the internet, where you can go do a lot of this stuff for cheaper, right? But in my experience, it's what you don't know that gets you in trouble. And it's those right questions to your point. I don't care how a client answers that question per se. I just want to make sure they answer it. Because if they never answer it, they never get to the right solution for their family. And that's what our goal is, is to protect you, protect your family, and protect your assets in the manner in which you want to during life and after death.

21:47And if you aren't asked the right questions, you never get there.